United States

Recession hits US wind energy market

UNITED STATES: It has been the worst of times, and the best of times may not be returning soon.

Involvement: Federal policies remain uncertain despite Obama interest
In fact, gloom is besetting wind owner-developers in the US as they slash plans for installations this year and next — in several cases by as much as half.

These moves come despite eligibility for two major government subsidies that are about to expire quite soon, something that in a normal market would create a boom.

Blame lies with the recession, uncertain government policy, a glut of natural gas, and an excess of wind farms that were planned or constructed when electricity prices were at their peak.

Wind project owner-developers of all sizes report that power purchase agreement (PPAs) to sell the power to utilities are still hard to come by, especially in areas with relatively high prices per MWh, such as California and New England. Often PPAs can only be agreed by accepting a reduced price.

Spot market prices given for imminent delivery of power from so-called "naked" wind farms — those with no PPAs — remain low too, as much as 20% to 60% below pre-recession prices.

Nor does it help that power demand has dropped because of the economic slump, a rare situation that could make utilities wary of signing up more electricity.

The future of national energy policy is as unsure as ever because of nervousness, bickering and entrenched interests among elected congressional lawmakers in Washington DC.

The wind industry is also steadily nearing yet another crisis, with eligibility for the government’s cash grants through its economy-boosting Section 1603 set to close at the end of 2011, and then the end of the renewable energy production tax credit (PTC) in December 2012.

Investment crisis

"The US market right now is not good," says Don Furman, senior vice-president of external affairs at Iberdrola Renewables, the world’s largest wind power developer and owner.

"Conditions do not justify the kind of capital investment we’ve had in the past."

Iberdrola invested almost $2 billion in wind in the US each year from 2008 to 2010, installing more than 3GW.

In 2010, it added more new capacity than any other owner-developer in the US.

Steve Trenholm, CEO of E.on Climate and Renewables North America, says the company’s development programme, while it has not changed recently, is not nearly as aggressive as in the past.

"In my view, you should not force projects onto a market that is not ready," he said. E.on typically finances its own projects from its balance sheet. This year, depending on when a second project completes, it will add 150MW to 300MW capacity. At the end of 2010, E.on had 1.9GW in the US.

Jan Paulin, a wind industry doyen who is now CEO of developer Cielo Wind Power, agrees that the economics for project development — a high-risk venture at the best of times — are not favourable.

He denounces federal policy as a disaster. Yet, Gary Hardke, president of San Diego-based Cannon Power Group and a 30-year veteran of the industry, points to positive signals: "The market’s a little healthier than it’s been," he says. "But it’s a mixed bag; only the very best projects can get financed."

Japan factor

Glimmers of light at the end of the tunnel are indeed few but the industry is large enough nowadays to maintain a momentum that is helping it through the downturn. Indeed, there is a feeling, although not widespread, that the availability of financing is beginning to ease up a little.

The unfolding nuclear disaster in Japan, higher gasoline prices at the pump and turmoil in the Middle East have been prompting some public and legislative attention on clean, home-grown sources of energy, even though there is no direct connection between wind power and petrol prices.

In addition, some states continue to lead the country with innovative policies. For example, in early April California looked likely to enact a new aggressive requirement for investor-owned utilities to source 33% of power from renewables such as wind by 2020.

A stark example of the US industry’s status comes from Spanish-owned Iberdrola. About two months into 2011, the company halved its plans for adding some 1GW per year to its US portfolio in 2011 and 2012.

It now expects to add 650MW in 2011 and just 350MW in 2012, says spokeswoman Jan Johnson.

That’s quite a drop from its 1.37GW growth in 2010. Horizon Wind Energy, owned by Portugal’s EDP Renováveis, and which added 499MW last year, is cutting its US plans by a similar margin this year, reports the Wall Street Journal.

In contrast, MidAmerican Energy, the number four developer/owner in the US, will be adding 597.4MW this year, up from less than 150MW in 2010.

And NextEra Energy Resources of Florida, the largest owner-developer of wind plants in the US, continues to report that it plans to have added another 3.5GW to 5GW capacity in the US and Canada by the end of 2014, including repowering of 300-400MW in California’s Altamont Pass, plans that have not changed since May 2010.

It added 754MW of wind generation in 2010, totalling ownership of 8.29GW in North America.

Over-capacity has been an issue especially with the industry having installed a record 9.5GW in the US as recently as 2009, up 40% on 2008.

"We did not anticipate the recession," says Iberdrola’s Furman.

"We had ordered turbines as if the growth would continue. So we were left with excess turbines."

There have also been too many renewable energy credits available on the market, he says, making it harder to sell them on to companies that have not distributed enough low-carbon energy.

Furman notes, however, that the industry is in far better shape to make it through the trough than ever before, adding: "We’re in the wind business for the long-term.

We have some critical mass, we’re not going anywhere. We have a lot of assets to maintain." Iberdrola, the second largest developer-owner in the US, owned 4.6GW at the end of 2010.

Prices of equipment, both major and sub-components, have probably bottomed out, Cielo’s Paulin concurs: "It is unrealistic to think that there is more to give on that side."

He says there is also only one way for financing costs, or interest rates, to move — and that’s up. Others say that project finance is already becoming easier, despite the pool of finance available to wind having shrunk by more than 60% a year, to $3 or $4 billion.

Buying power

A dearth of long-term contracts for purchasing power is another hindrance to the US, the world’s largest wind market until it was surpassed by China in 2010.

"Prices are down, and fewer utilities are willing to execute PPAs," says Furman.

Power contracts are conventionally the cornerstone for a project, unless the electricity is placed on the spot market, often at a lower price and always with less price certainty.

The ability of a developer to sign a PPA and the availability of transmission are major factors in determining construction. Where will Iberdrola build in the US this year?

"We have a pipeline of many more megawatts than we expect to build — in all parts of North America," says Furman. "Which ones proceed will depend on where we can find a counterparty for a PPA."

While NextEra last year signed long-term PPAs for 1.23GW, officials have admitted that the company does not have any for about $1 billion worth of wind turbines with an installed capacity of 612MW.

"Contracting these megawatts continues to be a high priority for us." Of the 1.1GW of wind to be added this year, roughly 553MW had PPA contracts and so would be completed, said Hay.

Hardke says the success of the next 18 months in the US for developer Cannon, which has 3GW of wind projects in its pipeline globally, depends on PPA availability, and on stable federal government policy.

In fact, all the owner-developers interviewed cite strong and predictable government policy as essential to the health of the US market.

An especially popular option is a renewable or clean energy standard (RES or CES), although the latter would need to have a generous allocation for wind and other truly clean sources.

But the devil is in the detail on how good an RES or CES would be, warn the developers.

It is the predictability of federal policy that is most essential, but so lacking, say some.

"Beyond 2012, we just don’t know what kind of support mechanism there will be," says E.on’s Trenholm.

"We simply don’t know if there will be a support mechanism."

Trenholm is alluding to the expiry of eligibility for the production tax credit after 2012, and the ending of the eligibility for Section 1603, which offers cash grants worth roughly 30% of a project’s installed cost, in lieu of the PTC.

To be eligible for Section 1603, initiated following the global financial crisis of 2008, a project must be under construction within 2011. Developers say it is impossible to put together a five-year business plan without greater certainty.

"It will be 2013 or 2014 before we really see demand for wind return," says Furman.

"By December 2012, the opportunities via current legislation may have closed, and unless something is done, as Paulin predicted in April: "Twenty months from today, the industry will literally be swinging in the wind!"

Policy on hold

Trenholm and other senior wind officials have lobbied federal government with, he says, a little success. Soaring domestic gasoline prices have helped to force politicians and the public to think about energy use and security. Japan’s nuclear problems are also significant, says Cielo’s Paulin.

"There will be a re-assessment, but what form it takes remains to be seen."

Even so, action on renewables is unlikely to top the agenda in the government’s gridlocked Washington DC, where budget woes are high and thoughts are turning to the 2012 elections.

Section 1603 is unlikely to be extended, ramping up competition for tax equity. The tax credit may expire — it has been extended in fits and starts since 1995, sometime after expiration, creating the US’s infamous boom-and-bust wind development.

A PTC extension of five to 10 years would be ideal, says Trenholm, although Paulin would prefer another less complicated tool, such as a carbon tax.

But any new mechanism is unlikely before 2013 — when President Obama or his successor starts a new term.

DEMAND DROP WIND READY TO RELEASE PAUSE BUTTON

An ailing economy and the consequent dip in US electricity demand has hammered the wind market. Electricity demand has fallen by 2% to 4% a year, although it has recovered by roughly 2% this year.

Don Furman (right), senior vice-president of external affairs at developer Iberdrola Renewables, has not seen anything like it in the electricity industry in 30 years.

"We have to wait for demand to come back," he says of possible industry recovery.

Tony Dorazio, senior vice-president for wind development at Duke Energy Generation Services, is also acutely aware of the dip.

Asked about the wind sector’s health, he says: "It definitely has a cold, and that’s driven mostly by power demand, which has not recovered." Duke Energy was in the top five wind owners in terms of added capacity in 2010.

What would Dorazio like to see from the US government to help trigger a market recovery?

"I’m looking for signals from the economy, as well as from the government, that it will support more transmission by making it easier and quicker to build," he says.

This year will be a slow one for Duke but its added capacity in 2012 and 2013 will return to pre-recession levels, he says.

Also affecting demand for wind is a drop in natural gas prices to less than $4 per million BTUs, in part because of plentiful domestic shale gas.

"Since gas is ‘on the margin’ in most places, power prices will remain depressed for the longer term," says Jan Paulin of developer Cielo Wind Power.

Opinion is divided on when gas prices might change, although there are some signs of a rise because of Japan’s need for gas as it scrambles to restore generating capacity in the wake of March’s earthquake and tsunami.

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